Lufthansa Forges Ahead with Cost-Cutting

German powerhouse Lufthansa may be Europe's third-largest airline, but lately it has felt something like Gulliver tied down by an onslaught of Lilliputians in the guise of Europe's budget air carriers like Ryanair or EasyJet.

That's why CEO Wolfgang Mayrhuber (photo) has embarked on a campaign to slash costs at the airline, which at the end of last year found itself swimming in a sea of red ink and wondering about its long-term chances of survival in an era where early bookers can fly from Germany to the UK for €15 ($20) on low-cost carriers.

On Monday, the company reached a pay deal with the union representing 4,400 pilots that included a wage freeze for 23 months. The agreement will save the company more than €30 million a year.

The agreement, which will take retroactive effect to May 1, 2004 and runs until March 31, 2006, includes lower starting pay for new pilots, requires an extra two hours a month flying time before overtime kicks in and generally makes working times more flexible.

Chief Lufthansa negotiator Stefan Lauer said the agreement was "a milestone in concerted action to ensure competitive personnel costs."

The pilots' union Vereinigung Cockpit said the deal includes improvements in pension arrangements and brings the low-cost affiliate Germanwings into the company's collective bargaining agreement.

Turbulent few years

In addition to cut-throat competition from the discount carriers, Lufthansa has also been hit by a decline in air travel, attributed to the terrorist attacks in the United States on Sept. 11, 2001, and overall slower economic growth. Fuel price rises in recent months have also depressed profits.

The carrier was not helped by the fact that Germany has become continental Europe's most competitive travel market. "The low-cost market in Germany has absolutely exploded," Tim Coombs, a managing director at Aviation Economics, told Bloomberg.

Last year proved a low point, when the airline reported a record loss of €980 million. CEO Mayrhuber, 57, decided to take drastic action, which he first outlined in November 2003.

Already familiar with slashing costs -- he was placed in charge of cost-cutting in 1992 to save the carrier from bankruptcy -- he announced a plan to turn Lufthansa's fortunes around in the next two years by cutting €1.2 billion or some 20 percent. He said 2,000 jobs would be eliminated by 2005, following 3,600 that were cut due to a hiring freeze put into place last year.

Is it enough?

But some analysts wonder if Lufthansa is flying fast enough to stay above insolvency.

The agreement is "nice to have, but it's not a big step," Uwe Weinreich, an analyst with HVB Bank in Munich told Bloomberg. "It's only a €30 million chunk out of €4.6 billion in personnel costs every year. Nevertheless, it's a good indication that they can reach a settlement with the other unions," such as those representing the company's 38,000 ground crew and 14,000 flight attendants.

Besides the cost cutting, Lufthansa has been lowering fares and making ticketing more flexible in an attempt to attract customers. Even so, Lufthansa's fares on short-haul routes are still often triple those of low-cost competitors.

Still, things appear to be looking up. The company's cost-cutting plans combined with increased passenger numbers appear to be having an effect, and the carrier announced a third quarter profit of €125 million, largely due to an increase in air traffic revenue of 10 percent.

Mayrhuber said cuts still needed to be deeper and problems of overcapacity addressed if the company is to stay healthy in the long run.

"Our current numbers should not hide the fact that we clearly need better operating earnings, in order to secure the future of the enterprise for the next generation," he said last month.

But after Monday's pay agreement, he was feeling somewhat better.

"Lufthansa now has the chance to grow in Europe again," he said.